Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN: 9781285190907
Author: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher: Cengage Learning
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Textbook Question
Chapter 5, Problem 16PC
Delta Air Lines, Inc., is one of the largest airlines in the United States. It has operated on the verge of bankruptcy for several years. Exhibit 5.18 presents selected financial data for Delta Air Lines for each of the five years ending December 31, 2000, to December 31, 2004. Delta Air Lines filed for bankruptcy on September 14, 2005. We recommend that you create an Excel spreadsheet to compute the values of the ratios and the Altman’s Z-score in Requirements a and b, respectively.
REQUIRED
- a. Compute the value of each the following risk ratios.
- (1) Current ratio (at the end of 2000–2004)
- (2) Operating cash flow to current liabilities ratio (for 2001–2004)
- (3) Liabilities to assets ratio (at the end of 2000–2004)
- (4) Long-term debt to long-term capital ratio (at the end of 2000–2004)
- (5) Operating cash flow to total liabilities ratio (for 2001–2004)
- (6) Interest coverage ratio (for 2000–2004)
- b. Compute the value of Altman’s Z-score for Delta Air Lines for each year from 2000–2004.
- c. Using the analyses in Requirements a and b, discuss the most important factors that signaled the likelihood of bankruptcy of Delta Air Lines in 2005.
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CORPORATE GOVERNANCE FAILURE IN THE LEHMAN BROTHERS On September 15, 2008, Lehman Brothers filed for bankruptcy. With $639 billion in assets and $619 billion in debt, Lehman's bankruptcy filing was the largest in history, as its assets far surpassed those of previous bankrupt giants such as WorldCom and Enron. Lehman was the fourth-largest U.S. investment bank at the time of its collapse, with 25,000 employees worldwide. Lehman's demise also made it the largest victim of the U.S. subprime mortgage-induced financial crisis that swept through global financial markets in 2008. Lehman's collapse was a seminal event that greatly intensified the 2008 crisis and contributed to the erosion of close to $10 trillion in market capitalization from global equity markets in October 2008 – the biggest monthly decline on record at the time.
The Beginning of the End for Lehman In 2007, Lehman underwrote more mortgage-backed securities…
Holmes Corporation has filed a voluntary petition with the bankruptcy court in hopes of reorganizing. A statement of financial affairs has been prepared for the company showing these debts:
Liabilities with priority:Salaries payable . . . . . . . . . $ 18,000Fully secured creditors:Notes payable (secured by land and buildings valued at $84,000) . . 70,000Partially secured creditors:Notes payable (secured by inventory valued at $30,000) . . . . . . . . . 140,000Unsecured creditors:Notes payable . . . . . . . . . . . . 50,000 Accounts payable . . . . . 10,000Accrued expenses . . . . . . . . . . . . 4,000
Holmes has 10,000 shares of common stock outstanding with a par value of $5 per share. In addition, it is currently reporting a deficit balance of $132,000.Company officials have proposed the following reorganization plan:∙ The company’s assets have a total book value of $210,000, an amount considered to be equal to fair value. The reorganization value of the assets as a whole,…
RadioShack Corporation is a consumer electronics retailer. Recently, the company declared bankruptcy to provide financial protection while attempting to reorganize its operations. Annual report information for the three most recent years prior to the bankruptcy are as follows (in millions):
1
Year 3
Year 2
Year 1
2
Cash flows from operating activities
$36.00
$(43.00)
$218.00
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(42.00)
(68.00)
(82.00)
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3,434.00
3,831.00
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a. Determine the free cash flow.*
b. Determine the ratio of free cash flow to sales. Round percentages to one decimal place.*
c. Did the free cash flow information indicate financial stress? Explain.
*For those boxes in which you must enter subtractive or negative numbers use a minus sign.
a. Determine the free cash flow. For those boxes in which you must enter subtractive or negative numbers use a minus…
Chapter 5 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
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Ch. 5 - Market equity beta measures the covariability of a...Ch. 5 - Altmans bankruptcy risk model utilizes the values...Ch. 5 - Calculating and Interpreting Risk Ratios. Refer to...Ch. 5 - Refer to the financial state-ment data for...Ch. 5 - Refer to the profitability ratios of Coca-Cola in...Ch. 5 - Delta Air Lines, Inc., is one of the largest...Ch. 5 - Prob. 17PCCh. 5 - Prob. 18PCCh. 5 - Prob. 19PCCh. 5 - Prob. 20PCCh. 5 - Prob. 21PCCh. 5 - Prob. 22PCCh. 5 - Compute the values of each of the ratios in...
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